Capital City Bank Group, Inc.

Reports Third Quarter 2013 Results

TALLAHASSEE, Fla. (October 29, 2013) – Capital City Bank Group, Inc. (NASDAQ: CCBG) today reported net income of $1.6 million, or $0.09 per diluted share for the third quarter of 2013 compared to net income of $0.8 million, or $0.05 per diluted share for the second quarter of 2013, and net income of $1.1 million, or $0.07 per diluted share, for the third quarter of 2012. For the first nine months of 2013, the Company reported net income of $3.3 million, or $0.19 per diluted share, compared to a net loss of $1.8 million, or $0.10 per diluted share for the same period in 2012.

Compared to the second quarter of 2013, performance reflects a lower loan loss provision of $0.9 million, an increase in noninterest income of $0.5 million and a decrease in noninterest expense of $0.1 million, partially offset by lower net interest income of $0.4 million and higher income taxes of $0.3 million.

Compared to the third quarter of 2012, the increase in earnings was due to a lower loan loss provision of $2.3 million and higher noninterest income of $0.7 million, partially offset by lower net interest income of $1.8 million, an increase in noninterest expense of $0.2 million and higher income taxes of $0.5 million.

The increase in earnings for the first nine months of 2013 versus the comparable period in 2012 is attributable to a lower loan loss provision of $10.3 million, an increase in noninterest income of $0.7 million and a decrease in noninterest expense of $2.9 million, partially offset by a reduction in net interest income of $5.0 million and higher income taxes of $3.8 million.

“We continue to make progress as improving credit quality has led to lower credit costs and expense management initiatives are resulting in lower operating costs,” said William G. Smith, Jr., Chairman, President and CEO.  “Our credit metrics continue to improve with nonperforming assets declining for the seventh consecutive quarter, reaching their lowest level since the third quarter of 2008. Past due loans are also at the lowest level we’ve seen since this cycle began. Our retail strategy for the disposition of OREO continues to produce strong results, and we remain committed to this approach as we believe it generates the best economic outcome for our shareowners.  While improving credit costs have been the greatest contributor, year-to-date earnings have also benefited from higher fee income and lower operating expenses.  Although choppy, we are making steady progress, and I am encouraged about the future,” said Smith.

The Return on Average Assets was 0.25% and the Return on Average Equity was 2.51% for the third quarter of 2013. These metrics were 0.13% and 1.35% for the second quarter of 2013, and 0.17% and 1.77% for the third quarter of 2012, respectively.

For the first nine months of 2013, the Return on Average Assets was 0.17% and the Return on Average Equity was 1.75% compared to -0.09% and -0.93%, respectively, for the same period in 2012.

Discussion of Financial Condition

Average earning assets were $2.201 billion for the third quarter of 2013, a decrease of $5.3 million, or 0.2%, from the second of 2013 and an increase of $22.4 million, or 1.0%, over the fourth quarter of 2012.  The change in earning assets from the prior quarter reflects a decline in the overnight funds position reflecting a lower level of deposits. The increase compared to the fourth quarter of 2012 primarily reflects a higher level of public fund deposits.

We maintained an average net overnight funds (deposits with banks plus fed funds sold less fed funds purchased) sold position of $412.1 million during the third quarter of 2013 compared to an average net overnight funds sold position of $419.0 million in the second quarter of 2013 and an average overnight funds sold position of $366.0 million in the fourth quarter of 2012.  The lower balance when compared to the second quarter of 2013 primarily reflects the decline in deposits. Additionally, a shift in earning asset mix continued to occur due to growth in the investment portfolio while the loan portfolio declined. The increase when compared to the fourth quarter of 2012 reflects the declining loan portfolio and a higher level of public funds, partially offset by an increase in the investment portfolio.

Economic uncertainty and deleveraging by our clients continues to generate a historically high level of liquidity, which, given the current operating environment, is difficult to profitably deploy without taking inordinate risks. Where practical we are working to lower the level of overnight funds by adding to our investment portfolio with short-duration securities and reducing deposit balances. We continue to use a fully-insured money market account which is offered by a third party and can serve as an alternative investment for some of our higher balance depositors while at the same time allowing us to maintain the account relationship. Until such time that attractive investment alternatives arise, we will continue to execute these strategies as well as seek other initiatives in an effort to lower our overnight fund balances.

When compared to the second quarter of 2013 and fourth quarter of 2012, average loans declined by $20.9 million and $82.2 million, respectively. Most loan categories have experienced declines with the reduction primarily in the commercial real estate and residential real estate categories. Our core loan portfolio continues to be impacted by normal amortization and a higher level of payoffs that have outpaced our new loan production.

New loan production has improved over the past four quarters as our efforts to stimulate loan growth are ongoing. Without compromising our credit standards or taking on inordinate interest rate risk, we have modified several lending programs in our business and commercial real estate areas to try and mitigate the significant impact that consumer and business deleveraging is having on our portfolio.

Nonperforming assets (nonaccrual loans and OREO) totaled $94.7 million at the end of the third quarter of 2013, a decrease of $2.0 million from the second quarter of 2013 and $22.9 million from the fourth quarter of 2012. Nonaccrual loans totaled $41.7 million at the end of the third quarter of 2013, a slight increase of $0.1 million over the second quarter of 2013 and a decrease of $22.5 million from the fourth quarter of 2012. Nonaccrual loan additions totaled $11.1 million in the third quarter of 2013 and $29.6 million for the first nine months of 2013, which compares to $48.5 million in the first nine months of 2012. The balance of OREO totaled $53.0 million at the end of the third quarter of 2013, a decrease of $2.1 million from the second quarter of 2013 and $0.4 million from the fourth quarter of 2012. For the third quarter of 2013 we added properties totaling $3.7 million, sold properties totaling $5.2 million, and recorded valuation adjustments totaling $0.6 million. For the first nine months of 2013, we have added properties totaling $21.0 million, sold properties totaling $18.5 million, and recorded valuation adjustments totaling $2.9 million. Nonperforming assets represented 3.77% of total assets at both September 30, 2013 and June 30, 2013,and 4.47% at December 31, 2012.

Average total deposits were $2.059 billion for the third quarter of 2013, a decrease of $8.1 million, or 0.4%, from the second quarter of 2013 and higher by $8.4 million, or 0.4%, over the fourth quarter of 2012.  The decrease in deposits when compared to the second quarter of 2013 resulted primarily from the reduction in the level of public funds and money market accounts, partially offset by higher noninterest bearing demand and savings accounts. When compared to the fourth quarter of 2012, the increase was a result of higher public funds and savings accounts, partially offset by lower certificates of deposit and regular NOWs.

Core deposits experienced growth when compared to both periods as the Bank continues to expand relationships and grow the client base. The seasonal inflow of public funds will begin late in the fourth quarter of 2013 and continue into the first quarter of 2014. Both events are anticipated to increase the overnight funds position during the fourth quarter.

Our mix of deposits continues to improve as higher cost certificates of deposit are replaced with lower rate non-maturity deposits and noninterest bearing demand accounts.  Prudent pricing discipline will continue to be the key to managing our mix of deposits.  Therefore, we do not attempt to compete with higher rate paying competitors for deposits.

Average borrowings decreased by $2.6 million when compared to the second quarter of 2013 as a result of payoff/amortization of FHLB advances and lower repurchase agreement balances. Borrowings increased by $2.2 million when compared to the fourth quarter of 2012, primarily a result of higher repurchase agreement balances, partially offset by FHLB advance payoffs/amortization.

Discussion of Operating Results

Tax equivalent net interest income for the third quarter of 2013 was $19.4 million compared to $19.7 million for the second quarter of 2013 and $21.2 million for the third quarter of 2012.  The decrease in tax equivalent net interest income compared to the prior periods was due to a reduction in loan income primarily attributable to declining loan balances and unfavorable asset repricing, partially offset by a reduction in interest expense and a lower level of foregone interest on loans.  The lower interest expense is attributable to favorable repricing on FHLB advances and certificates of deposit, which reflects both lower balances and favorable repricing. For the nine months ended September 30, 2013, tax equivalent net interest income totaled $59.2 million compared to $64.3 million for the same period of 2012.

Pressure on net interest income continues primarily as a result of the declining loan portfolio and the low rate environment.  Loans have declined by approximately $102 million since the third quarter of 2012. The low rate environment, although favorable to the repricing of deposits, continues to negatively impact the loan and investment portfolios. Increased lending competition in all markets has also unfavorably impacted the pricing for loans.

Lowering our cost of funds, to the extent we can, and continuing to shift the mix of our deposits will help to partially mitigate the unfavorable impact of weak loan demand and repricing, although the impact is expected to be minimal. 

The net interest margin for the third quarter of 2013 was 3.49%, a decrease of ten basis points from the second quarter of 2013, and a decline of 33 basis points from the third quarter of 2012.  The decrease in the margin for both comparable periods is attributable to the shift in our earning asset mix and unfavorable asset repricing, partially offset by a lower average cost of funds.

The provision for loan losses for the third quarter of 2013 was $0.6 million compared to $1.4 million in the second quarter of 2013 and $2.9 million for the third quarter of 2012. For the nine month period ended September 30, 2013, the loan loss provision totaled $3.1 million compared to $13.4 million for the same period in 2012. The decrease compared to the second quarter of 2013 reflects continued improvement in key credit metrics, including our level of classified loans which declined noticeably during the quarter. The reduction in the provision from both of the prior year periods was due to a significant decline in loan losses, a reduced level of problem loan inflow, and overall improvement in key credit metric trends. Net charge-offs for the third quarter of 2013 totaled $2.8 million, or 0.78%(annualized), of average loans compared to $2.0 million, or 0.54%, for the second quarter of 2013 and $2.6 million, or 0.66%, in the third quarter of 2012. For the first nine months of 2013, net charge-offs totaled $7.2 million, or 0.66%(annualized), of average loans compared to $14.2 million, or 1.21%, for the same period of 2012. Lower charge-offs in our residential real estate and commercial real estate portfolios drove the decrease in loan losses comparing 2013 to 2012. At September 30, 2013, the allowance for loan losses of $25.0 million was 1.75% of outstanding loans (net of overdrafts) and provided coverage of 60% of nonperforming loans compared to 1.89% and 66%, respectively, at June 30, 2013, and 1.93% and 45%, respectively, at December 31, 2012.

Noninterest income for the third quarter of 2013 totaled $14.3 million, an increase of $0.5 million, or 3.3%, over the second quarter of 2013 and $0.7 million, or 5.4%, over the third quarter of 2012. The increase over the second quarter of 2013 was driven by higher deposit fees of $0.3 million and wealth management fees of $0.2 million. The increase in deposit fees was due to higher overdraft fees and the increase in wealth management primarily reflects an increase in retail brokerage fees due to increased client trading activity. Compared to the third quarter of 2012, the increase was due to higher wealth management fees driven by an increase in retail brokerage fees reflective of increased client trading activity and growth in new accounts. For the nine month period ended September 30, 2013, noninterest income totaled $41.7 million, a $0.7 million increase over the same period in 2012 due to higher wealth management fees of $0.6 million and mortgage banking fees of $0.2 million. Wealth management fees increased due to higher retail brokerage fees reflective of increased client trading activity and growth in new account openings. The increase in mortgage fees was attributable to a higher margin for sold loans.

Noninterest expense for the third quarter of 2013 totaled $30.4 million, a decrease of $0.1 million, or 0.5%, from the second quarter of 2013 attributable to lower compensation expense of $0.5 million and OREO expense of $0.3 million, partially offset by higher occupancy expense of $0.3 million and other expense of $0.4 million. Compensation expense declined primarily due to a reduction in pension expense reflective of a lower required 2013 expense upon finalization of actuarial work. Lower stock compensation also contributed to the decrease. The decrease in OREO expense was due to a reduction in the level of property valuation adjustments. The increase in occupancy expense was driven by a higher level of premises maintenance activity as well as utility costs. Higher advertising costs and professional fees drove the increase in the other expense category. Compared to the third quarter of 2012, noninterest expense increased by $0.2 million, or 0.8%, primarily reflective of higher compensation expense of $0.6 million that was partially offset by lower OREO expense of $0.5 million. Higher pension expense and stock compensation expense drove the increase in compensation. The reduction in OREO expense reflects a reduced level of property valuation adjustments as well as property carrying costs. For the nine month period ended September 30, 2013, noninterest expense totaled $92.2 million, a decrease of $2.9 million, or 3.0%, from the same period of 2012 attributable to lower occupancy expense of $0.6 million, OREO expense of $2.1 million, intangible amortization expense of $0.2 million, and other expense of $1.1 million, partially offset by higher compensation expense of $1.1 million. Declines were realized in most of the occupancy expense categories and were generally driven by stronger cost controls and other cost reduction initiatives. The reduction in OREO expense was primarily attributable to a lower level of losses from the sale of properties and to a lesser extent reduction in carrying costs for properties. The decrease in intangible amortization reflects the full amortization of our remaining core deposit intangible asset in early 2013. The other expense category declined due to reduction in legal fees, professional fees, postage costs, and printing/supplies expense. Higher compensation expense reflects an increase in our pension plan expense of $0.8 million, stock compensation expense of $0.8 million, and associate insurance expense of $0.2 million that was partially offset by lower salary expense of $0.7 million.

About Capital City Bank Group, Inc.

Capital City Bank Group, Inc. (Nasdaq: CCBG) is one of the largest publicly traded bank holding companies headquartered in Florida and has approximately $2.5 billion in assets. The Company provides a full range of banking services, including traditional deposit and credit services, asset management, trust, mortgage banking, merchant services, bankcards, data processing and securities brokerage services. The Company's bank subsidiary, Capital City Bank, was founded in 1895 and now has 63 full-service offices and 71 ATMs in Florida, Georgia and Alabama. For more information about Capital City Bank Group, Inc., visit www.ccbg.com.

FORWARD-LOOKING STATEMENTS

Forward-looking statements in this Press Release are based on current plans and expectations that are subject to uncertainties and risks, which could cause the Company’s future results to differ materially. The following factors, among others, could cause the Company’s actual results to differ: the Company’s need and our ability to incur additional debt or equity financing; the accuracy of the Company’s financial statement estimates and assumptions, including the estimate used for the Company’s loan loss provision and deferred tax valuation allowance; a decrease to the market value of the Company that could result in an impairment of goodwill; legislative or regulatory changes, including the Dodd-Frank Act and Basel III; the strength of the U.S. economy and the local economies where the Company conducts operations; the frequency and magnitude of foreclosure of the Company’s loans; restrictions on our operations, including the inability to pay dividends without our regulators’ consent; the effects of the health and soundness of other financial institutions; the effects of the Company’s lack of a diversified loan portfolio, including the risks of geographic and industry concentrations; harsh weather conditions and man-made disasters; fluctuations in inflation, interest rates, or monetary policies; changes in the stock market and other capital and real estate markets; customer acceptance of third-party products and services; increased competition and its effect on pricing, including the long-term impact on our net interest margin from the repeal of Regulation Q; negative publicity and the impact on our reputation; technological changes, especially changes that allow out of market competitors to compete in our markets; the effects of security breaches and computer viruses that may affect the Company’s computer systems; changes in consumer spending and savings habits; the Company’s growth and profitability; changes in accounting; and the Company’s ability to manage the risks involved in the foregoing. Additional factors can be found in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012, and the Company’s other filings with the SEC, which are available at the SEC’s internet site (http://www.sec.gov). Forward-looking statements in this Press Release speak only as of the date of the Press Release, and the Company assumes no obligation to update forward-looking statements or the reasons why actual results could differ.